CALGARY – The search for a new boss at Canadian Pacific Railway Ltd. is underway after an activist hedge fund succeeded in its months-long battle to oust CEO Fred Green, a 34-year veteran of the railroad.
Green, chairman John Cleghorn and four other directors conceded defeat to Pershing Square Capital Management just hours before a bitter proxy fight was to come to a showdown at CP’s annual meeting Thursday.
The meeting lasted only a few minutes and saw none of the fireworks many had been expecting.
The newly formed board — consisting of all seven nominees on Pershing Square’s dissident slate and nine existing CP directors — met for the first time right after the annual meeting.
It announced later that railway veteran Stephen Tobias, a Pershing nominee to the board, would serve as interim CEO while a committee hunts for a new leader. Madeleine Paquin, president and chief executive of Logistec and a member of the incumbent board at CP, was named acting chairwoman.
“The board of directors of Canadian Pacific is united in its commitment to serving the best interests of this great company,” Paquin said in a statement.
“We are confident in the depth and breadth of this board and its ability to work with the management and all CP employees to serve our customers and communities. We are looking forward to working together to build value for our shareholders.”
Bill Ackman, founder and CEO of Pershing Square, CP’s largest shareholder with a 14 per cent stake, had been pushing to replace Green with Hunter Harrison, the retired boss of rival railroad Canadian National Railway Co. (TSX:CNR).
But he told reporters before the annual meeting not to expect a coronation.
“There aren’t an enormous number of candidates obviously,” he said.
“We’re going to do a proper job, we’re going to meet all the candidates and do it the right way.”
Harrison did not attend the meeting, although he himself is a shareholder and had expressed an eagerness to lead the company. Harrison was front and centre at a Pershing Square event for CP investors held in Toronto earlier this year.
“He wanted not to take the spotlight away from what this about, which is about a change in the board,” said Ackman.
Earlier this year, CN cancelled almost $40 million in future pension and other benefit payments to Harrison, accusing him of breaking non-compete and other agreements he signed when he retired in 2009.
CP had warned that Harrison’s leadership could mean deep cuts at the railroad and could jeopardize relationships with customers, many of whom publicly voiced support for Green and his team.
Desjardins Securities analyst Benoit Poirier said picking a new CEO should be a “relatively quick process,” given the strong support for Pershing Square and its slate of directors.
“We expect Hunter Harrison to be named President and CEO by the end of the year.”
The CP shakeup will open a new chapter for an iconic company that’s nearly as old as Canada.
The defeat of CP’s current leaders had been widely anticipated as a number of institutional fund managers disclosed they would support the nominees proposed by Ackman.
“We heard loud and clear your mandate for change and we’re honoured to work with the board to take this great company to even higher levels of performance and achievement,” Ackman told shareholders at the meeting.
“We will not make progress overnight, but we will deliver on our commitment to make this railway one of the best railways in the world.”
Green’s detractors say CP has become North America’s worst performing major railway under his leadership while his supporters insisted the problems have been exaggerated and Green was the best person for the job.
Green resigned “after taking into account the views expressed by shareholders about the desire for change,” Cleghorn, the outgoing chair and former Royal Bank chief, said at the meeting.
“I’m confident that the new board will move forward in a constructive way on behalf of all stakeholders,” Cleghorn added.
“We’ve got to have two strong railroads in this country.”
The new board is comprised of Ackman, Tobias, Paquin, Gary Colter, Rick George, Paul Haggis, Paul Hilal, Krystyna Hoeg, Tony Ingram, Richard Kelly, Rebecca MacDonald, John Manley, Anthony Melman, Linda Morgan, David Raisbeck and Hartley Richardson.
The company’s stock (TSX:CP) was little changed Thursday on the Toronto Stock Exchange, gaining 65 cents to $76.51.
Two of Canada’s largest pension funds — the Canada Pension Plan Investment Board and Ontario Teachers Pension Plan — publicly supported Pershing Square’s push for change.
“We thought that that approach and set of proposals represented better long-term value creation for CP and hence our support of it … we saw that as more constructive change than we were seeing from the existing board and management of CP,” CPPIB CEO David Denison said of the results.
Much of the debate in recent months had been over what could be done to improve Canadian Pacific’s operating ratio, a key performance metric in the railroad industry that calculates the percentage of revenues spent to operate the railroad.
CP believed it has a realistic plan to bring the ratio down from 80.1 per cent to 70 to 72 per cent for 2014 through cost cutting and revenue boosting.
It said there are structural factors — its trains have to traverse steep terrain, for example — that prevent it from pushing its operating ratio lower.
But Pershing Square has said that under Harrison’s leadership, CP can achieve a 65 per cent operating ratio by 2015.
Bob Schulz, a professor at the University of Calgary’s Haskayne School of Business, said the new CP has its work cut out for it.
“To take the company and turn it around in six months is hard to do because to increase an operating ratio you have to increase your prices or you have to cut your expenses,” said Schulz.
“You have to do something, but it’s hard to do things in six months with a rail line.”